Northern Italy and the republican tradition

The Emilia Romagna region in northern Italy gives an insight into how a republican economy might look in practice. The whole infrastructure is significantly geared towards cooperative production without any sign of lost efficiency. There is plenty the UK should learn.

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In a very important sense
republican political theory is a historical argument. It contends that freedom
has deeper roots than the modern liberal definition, that you are free simply
if your choices are not interfered with. Predating Liberalism was an older and
more demanding ‘Republican’ conception, that you are free if you are not
subject to the arbitrary will of another. A key historical reference for
republicans in making this argument is the civic humanist school of thought of
late 14th and early 15th century Italy.

The school arose amidst the
remarkable plethora of republican city states dotted around northern Italy
during the period. These ‘free’ cities were characterised by a degree of
political equality, freedom of association and prosperity unprecedented in
feudal Europe. As early as the 11th century, cities such as Pisa or
Milan were electing leaders - or podestas
- by citizens’ councils for fixed terms. Moreover, these councils were
often highly inclusive. The town of Modena was said to include fish-mongers on
its citizens’ council. They also had a wide variety of civic associations, from
communes to guilds to business partnerships, and this associative culture
facilitated the creation of sophisticated financial networks, laying the basis
for later European capitalism. Civic humanists, such as Leonardo Bruni or Coluccio Salutati,
stressed the importance of civic equality to a free society. Crucially, this
not only meant that individuals should be judged solely on personal virtues
rather than lineage or wealth, but also that every citizen enjoy an equal
opportunity to involve themselves in the business of government.

One of these free cities was
Bologna, the capital of the Emilia
Romagna region in northern Italy. The region has retained these age-old
civic traditions up to the present day and they have helped create a cooperative
based economy that belies the notion of a trade-off between economic equity and
efficiency. It thus represents a fruitful case study for those looking to
transform civic republican political principles into concrete forms of
political economy. The discussion of the region’s political economy here draws
greatly on the excellent summaries provided by American cooperative advocates John Logue
and John
Restakis.

One of the poorest Italian
regions in the 1970s, Emilia Romagna now has one of the highest GDP per capita
ratings in Europe. Around 30 – 40% of its GDP is provided by small employee-owned
cooperative firms. There is a high concentration of small businesses more
generally, with one person in 12 owning a small business or being
self-employed. In sum, the region has around 420,000 small firms, making it one
of the most entrepreneurial regions in the world. Individuals who are
self-employed or have a substantial say in how their workplaces are run are
much less susceptible to the arbitrary will of another. They are in this sense
more free. Cooperatives are particularly strong in retail, construction, social
services, agriculture and especially manufacturing. Half
of the region’s manufacturing output is exported. Moreover, the region’s
cooperative sector is often geared towards high-value added work, be it the
complex restoration of Bologna’s historic buildings by construction
cooperatives, or the supply of technologically advanced input parts to the
region’s ‘super-car’ manufacturers.

Emilia Romagna. Flickr/Lorenzog .Some rights reserved.

Policy supports for a
cooperative economy

The key challenge in creating a
viable system of economic democracy is scale.
Substantive democratic management is feasible at a small scale. However, as
firms grow the process of obtaining substantive deliberative input from
employee-members starts to become cumbersome and time-consuming. Yet market
forces pressurise small firms to aggregate into larger ones as the subsequent
economies of scale provide competitive advantages. For example, bigger firms
can reduce their costs by buying raw materials and other input goods in bulk.

The Emilia Romagna region has been
able to handle this tension in several ways.

Firstly, the region’s cooperative
economy has been facilitated by the wider constitutional framework, which gives
cooperatives special recognition. Article 45 of the Italian
constitution states:

The Republic
recognizes the social function of cooperation of a mutualistic nature and
without purposes of private speculation. The law promotes and encourages them
through the appropriate means and secures, through appropriate controls, their
character and purposes.

This constitutional recognition
was given a concrete policy grounding in the Basevi Law of 1947, Italy’s basic
cooperative law. This legislation gave cooperatives specific privileges and
responsibilities in order to encourage their self-capitalisation and long-term
viability. The privilege was in the form of a full corporation tax relief on
retained earnings. However, if the cooperative was sold, its reserves by law
would go to another cooperative or cooperative federation rather than the members,
who received returns through dividends or interest payments on their fees. While there have been some reforms to the
basic law since 1947 (for example, making the tax relief proportionate to the percentage of employees who are cooperative
members rather than salaried employees) the essence of Basevi remains in place
to this day.

By restricting the ability of
cooperative members to ‘cash in’ during good times, the Basevi law serves to institutionalise a sense of
intergenerational mutuality within cooperatives, which are seen to exist for
the benefit of both future and
present members. As one cooperative member says to John Logue: ‘We receive
wealth from past generations, and we create it for future generations of
members’. This legal restriction in turn serves to counteract the market
pressure for smaller firms to aggregate into bigger ones. This is why the
cooperative sector in Emilia Romagna has not gone the same way of British
building societies. The 1986 Building Society Act permitted societies to demutualise
and turn into limited companies if more than 75% of members voted for it.
Members would exchange their mutual rights for shares which they could then
freely sell on the market. By 2008 all the demutualised firms had either
collapsed or been absorbed into the big four banks.

Secondly, firms in Emilia Romagna
cooperate as well as compete in a reciprocal system that the economist Stefano
Zamagni has termed a ‘civil economy’. Typically, several small firms will
compete for a lucrative foreign contract. However, the winning firm will ensure
that they outsource some of the work to other losing firms. In return, they
expect outsourced work when they lose a contract. The practice of reciprocal
outsourcing not only provides economic stability to individual firms but
collectively allows them to service lucrative large scale contracts while
maintaining their small scale.

Thirdly, the Italian system
grants regional government a substantial amount of autonomy. This has allowed
local governments in Emilia Romagna to create an effective ‘industrial
district’ which supports cooperatives and small firms. As the late Paul Hirst explained,
industrial districts are collaborative bodies involving governmental
authorities and firms within a particular area. They provide cooperatives and
small firms with the common skills and facilities that usually only large
organisations have access to. Examples of such services include skills training
for staff, access to low cost capital, research and development expenditure and
marketing services. There is a critical role for government in providing and
financing these services but it has to be done at the local level in order to
tailor the industrial policy to the particular needs of the locality. In Emilia
Romagna, the regional development agency ERVET (Ente Regionale per la
Valorizzazione Economica del Territorio) provides small firms and cooperatives
with a range of such common services. This assistance is a key reason why the
region’s small firms and cooperatives stay competitive.

Is the model
exportable?

One cannot simply take the Emilia
Romagna blueprint and import it wholesale into the UK. However, there are
certainly steps a British republican government could take to encourage a more
cooperative economy in the UK. I propose three initial steps.

First, it should adopt the
Italian practice of providing cooperatives with tax relief on retained earnings
while also legislating for an ‘asset lock’ – the restriction that reserves can
only go to other cooperatives in the event of the cooperative being sold. UK legislation
already requires such an asset lock of Community Interest Companies but
no such requirement exists for cooperatives. This should change. Moreover, UK
cooperatives are currently recognised by UK law as Industrial and Provident
Societies which are liable to pay UK corporation tax on their profits. A full
tax relief on retained earnings should be introduced which, as in Italy, is
proportionate to the percentage of staff who are actually members of the
cooperative rather than salaried employees. These changes would help instil in
the UK the principle of intergenerational mutuality that has so helped the
Italian cooperative sector.

Second, it should genuinely
devolve powers down to local regions, so they have the capability to create the
requisite ‘industrial districts’ that cooperatives firms need to flourish.
Localisation is required because each industrial district has its own unique
economic properties and will require its own tailored policies. Inevitably
these policies require public funds so there also needs to be some genuine
fiscal devolution to accompany this. The
institutional structure for such devolution is already in place in the form of
Local Enterprise Partnerships, created by the Coalition government in 2011.
These bodies are collaborative partnerships between businesses and local
government, which are charged with encouraging economic growth and job creation
in their local areas. These are voluntary bodies – regions have to apply for
recognition. As of September 2012 there were 39 LEPs in operation. The next
steps are to ensure the creation of more LEPs, enough to cover the whole
country, provide them with decent finance, and also expand the stakeholder
representatives to include unions and community groups as well as business and
local government. A very complementary
policy would be a system of regional banks,
perhaps modelled on the successful German Sparkassen system, as adopted by Labour.

Third, it should encourage a
cooperative economy by measures which directly widen the distribution of
wealth. The right typically wish to encourage entrepreneurship by cutting
income tax rates but this usually benefits the already wealthy and exacerbates inequality. A better way of
encouraging small business and cooperative entrepreneurship would be to endow
individuals with substantive assets. One possibility, for example, is to
reintroduce and strengthen the Child Trust Fund so
that all individuals have a substantial capital endowment when they turn 18.
This would, of course, necessitate a political battle for higher taxation.
Aiming for a land
value tax may be the best way to win it.

I offer these three steps as
point marks for a wider discussion of what a republican political economy might
look like.